Winners and Losers Are Temporary | Series 7.5

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Welcome to the Enjoy More 30s Family Finance

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podcast. The only podcast dedicated to making life more

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enjoyable for young families by hitting on the financial topics

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that tend to weigh on us, stress us out, and distract our focus

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from simply enjoying life.

Joseph Okaly: 00:00:16

Hello, and welcome here to the next episode of this

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Raising Your Investment Mindset series. This series we're

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wanting to help you to reframe how you may view the scary

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unknown, that is investments, therefore be able to you know,

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utilize them in a more constructive way to better reach

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your goals and therefore make life more enjoyable. That would

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be great, right?

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So, as always, if you like what you're hearing, please make sure

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to subscribe or follow us on Apple podcasts or wherever you

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listen. Clicking the stars, leaving the reviews, it really

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really helps us reach the quite literally millions of other

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young families out there that are just like you.

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Last week, we discussed how our perceptions are based on what we

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hear and what we see. And when it comes to investments,

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Hollywood tends to only put out very negative ones, which can

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increase our uneasiness, decrease our likelihood of

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taking the steps we need to through investments or advice.

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So if you haven't checked out that episode, yet, you

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definitely want to do that soon.

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Today's episode is titled Winners and Losers Are

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Temporary, where we're going to cover just how like "every dog

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has its day", every area of the market tends to have its time in

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the lead, and how to emotionally make the most of that fact. The

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goal for today's episode, so what we've been saying is the if

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you can say this at the end of the episode, then you have

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succeeded statement is "I better understand how to view my

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winners and how to view my losers. So I better understand

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how to view my winners and to view my losers."

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Now horse racing is something that a lot of people enjoy. It

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is not at all my thing. Gambling in general is not something that

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I really partake in something that I find enjoyment in. That's

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just me, which I mean, as a financial advisor, that's

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probably a good thing. You don't probably want a financial

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advisor that loves gambling. But when it comes to the horse

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racing Triple Crown event, I always find myself somehow or

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another, you know, at least in front of a television for one or

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two of the races because I'm the weird one and most people like

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to actually watch this stuff. So let's say that I'm watching the,

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you know, second or third race in the Triple Crown series. I

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don't know what they're called but yeah, I know there's three

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of them. More times than not a horse that is the one that you

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know, won the prior round is most likely going to be the one

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that's the favorite for the next race. Right? You know, I mean,

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if they were faster than everybody last time, why

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wouldn't they be the fastest this time around, right? So it's

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logical for our minds to go in that way. If something worked

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for me last time, it's probably going to work for me the next

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time around, right? While logical, while very common

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sense, when it comes to investing this prebuilt human

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tendency winds up hurting us long term, many more times than

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it helps us. And as we've talked about before, there are all

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different areas of the market. There are large companies, small

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companies, US companies, foreign companies, growth companies,

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value companies, government bonds, high yield bonds, real

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estate. So each one of these areas tends to have times where

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it does really well and other times where it does poorly

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compared to the other areas of the market. Real estate is the

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most recent example of this that we just went through. In 2021

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the index went up over 45%. In 2020, it went down over 11%. So

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our human tendency would be after 2020 let's sell this, it

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went down 11%. Get me out of there, it went down, lost money.

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Let's try you know something else. That would be the normal

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logical human reaction, right? In 2021, though, it would have

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produced the exact opposite action, hey, this is the best

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area ever let me please put more money into real estate funds. So

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far this year, as of January 31, 2022, the real estate index is

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down around 6.5 percent. So as you can see, our pre built human

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tendency would have had us pull money out after it went down 12%

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or so in 2020. So what we would have missed out on going up 45%.

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But then that same tendency would have said oh wow, real

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estate's great again, let me put money back into it after 2021

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after it went up 45%, after we missed it, only to see it then

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decrease so far this year through the end of January in

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2022 by 6.5 percent.

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So we see the problem, right? It's pretty easy. It's pretty

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apparent. People tend to do the wrong thing because they're

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following what just happened thinking that what just happened

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is an indicator of what is going to happen next. Now, what's the

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solution, right? The first part of this is, in my opinion, and

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most opinions I've seen, is to try not to guess what's going to

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do well or not. So this is called market timing, trying to

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guess what areas we think are going to do well. There is no

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study that I've ever heard of or found that says, "This is anyhow

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plausible in the long term." I mean, if there was someone out

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there who guessed right every single time, every single year,

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I'm pretty sure that everybody's money would be with them by now,

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right? They are knowing what they're doing, if they guess,

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right, every single year. And the last one I've ever heard

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that said they could do this, I think was Bernie Madoff. And

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that didn't exactly work out too well. So I would be very, very

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skeptical about anybody out there who is saying that they

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can do that kind of thing.

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Winners and losers, when it comes to different areas of the

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market have been temporary when you look back at history.

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Emotionally though, selling something that just went up a

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bunch is not easy. So one thing to remember is that most returns

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are due to what area of the market, what box, so to speak,

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your fund may be in. So ABC large growth fund and DEF large

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growth fund will likely have similar returns very similar

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returns, just because they are in the same box, the same area

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of the market. This can sometimes help us remove that

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emotional attachment because it's not that we stumbled upon

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some magical mythical fund, it's we happen to be in the right

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broad area, the right box of the market, which probably just

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happened to do well in that particular year.

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So in our practical application of this, we do something called

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rebalancing. Rebalancing is basically taking the areas that

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did well, and selling them, and putting those funds into other

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areas that did not do well and buying them. This can be done on

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an annual basis, quarterly, monthly, even weekly, depending

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on the program. So for an example to kind of help us

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understand what this means, if large growth, that box, is

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supposed to be 10% of our portfolio, but it does so well

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compared to everything else that it goes up to 15% now, there's

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too much now in that piece. Rebalancing says, I sell that

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extra 5%, when it's high, and invest it into another area of

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the portfolio that is below where it is supposed to be when

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it's lower. Now, for most ordinary investors, this is not

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something I would recommend doing on your own, as you need

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to build out those ranges of how far different areas can stray

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and may be very, you know, difficult, and you have to be

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diligent about it. And you have to be emotionless about it when

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this is going on. And that's a tall task for anyone. If you saw

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in that same example, large growth did so well that now it's

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15% of the portfolio, human tendency says "Well, maybe it's

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going to go a little bit higher. Maybe it's going to go all the

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way up to 20% of the portfolio, I don't want to get out of it

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now." But that's the mentality where you know, you're not going

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to pull out of it until it starts going down. And that is

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when you kind of missed the high more times than not. So this

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rebalancing is what helps us do a diversified approach.

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So when we use an advisor who uses rebalancing, you know, they

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can help us with this. And obviously, that's my first

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choice, because I'm biased, I am an advisor, but if you're doing

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on your own, or through a work plan, or you're using an

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allocation or target date fund, you know, these are things that

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are built in when it's an allocation or target date fund.

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I would again not recommend somebody trying to manage

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individual pieces and do this rebalancing because you have to

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be again completely emotionless about it, you have to have the

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ranges set and as soon as it hits the ranges, boom, you're

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rebalancing. Or some plans allow you to do it automatically on an

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annual or quarter quarterly basis. So it needs to be

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something that's automated and if you're looking at it, and

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you're saying, "Oh, I'll remember to do it", you're not

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going to remember to do it. If you're going to say "I'm going

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to just wait for it to go a little bit higher", you're going

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to wind up missing those kinds of opportunities when it is

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high, and it's going to at some point start going down because

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most people won't want to sell it until they see it go down

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significantly. It's just it's just the truth of it. That's

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human nature. That's the emotional part. So when we have

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an advisor, where we have funds, like I said, the target date or

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the allocation funds where that manager is built in internally,

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now we're taking our emotions out of the equation. As we get

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to the end of this episode let's circle back around to the goal

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statement for today if you can now say "I better understand how

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to view my winners and my losers", then you have succeeded

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in the main takeaway from today.

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So thank you for tuning in today and join us for next week's

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episode called, We Can All Save Another $100 where we're going

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to cover just how powerful a little bit more, just a little

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bit more can be when we're young. Overall, if you're able

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to implement what we cover today, then that's fantastic.

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You have less to worry about that before and you can focus

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more just an enjoying life. That's the whole goal. If you're

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wanting help with these things, though, where you have questions

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you need help in clarifying, check out the ASK JOE section on

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the show's website EnjoyMore30s, that's EnjoyMore30s.com. You can

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also connect with me directly by visiting my wealth management

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firm New Horizons Wealth Management at nhwmllc.com. Until

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next week, thanks for joining me today and I look forward to

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connecting with you all again soon.

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The conversations on this show are

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Joe's opinions and provided for general information purposes

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only. They do not constitute accounting, legal, tax, or other

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professional advice for your specific situation. You should

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always seek appropriate advice from a financial advisor,

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accountant, lawyer, or other professional before acting upon

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any content or information found here first. Joe is affiliated

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with New Horizons Wealth Management LLC, a branch office

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of TFS Securities, Inc., and TFS Advisory Services an SEC

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Registered Investment Advisor Member FINRA/SIPC.